Few things are scarier in the tax world than an audit. Spending days, weeks, even months pouring through your books looking for discrepancies in your sales tax compliance and other ways to penalize your company can send terror into an e-commerce business.
A recent survey of businesses that were just audited showed that almost half were audited by their home state and almost half by other states. (Seven states made up 60% of out-of-state audits in the survey: Alabama, Arizona, California, Colorado, Georgia, New York and Texas. Top states for in-state audits were Alabama, California and Texas. More states are also leveraging technology to conduct virtual audits.)
Whatever the reason and however the method, audits are a worry, according to our latest annual sales tax survey of top finance execs. Though most respondents (85%) had already gone through a sales and use tax audit, there was a growing lack of confidence in audit preparedness in more than one in every five (22.53%) respondents.
An audit can uncover previous non-compliance that needs to be rectified. Non-compliance found during an audit in one state may indicate there is sales tax risk in other states as well – a truly scary prospect as audit begets audit and one bad audit could lead to other states and jurisdictions reaching out as well.
Reasons for an audit can vary from a jurisdiction’s unique methodology to audits of one’s customers or vendors to simple bad luck. Top reasons for sales tax audits can include not charging tax on taxable products, missing sales tax permits and calculating tax incorrectly –and missing resale certificates.
A resale certificate is a type of exemption certificate. A sales tax exemption eliminates your need to charge sales tax on otherwise taxable transactions. Your purchaser is responsible for issuing a valid exemption certificate; you the seller should perform a reasonable, good faith level of review when accepting the certificate.
These documents come in many different forms. Some are custom forms (sometimes even made to specifics by the customer themselves). Some are-state issued or come in a template issued by a state. Others are multi-jurisdictional forms that cover resale across many jurisdictions; others are designed to work with the Streamlined Sales Tax (SST) system.
Exempt buyers can include the federal government; some state and local governments and government contractors; schools; churches; non-profit hospitals; and charities.
If you can’t produce a valid certificate, an auditor is likely to assume a transaction was taxable.
Get that certificate and read it before you accept it. A certificate typically includes the buyer’s sales tax ID, a date, a signature and the reason for claiming the exemption (depending on the state, you may need to get additional information).
Buyers have a window, often 90 days, to produce their certificate, but get it in your files ASAP. Allow customers to submit the certificate any way they want – paper, email, phone and so on. You’ll collect more certificates that way.
Doublecheck state and buyer. Individual states issue specific certificates; some allow client-created certificates. Check the accuracy of a buyer’s certificate number and that a permit hasn’t expired. Most (but not all) state departments of taxation or revenue have online services to verify a certificate’s validity through a search.
Some state tax/revenue departments you’ll have to call, and on some states’ sites you have to enter your own ID number as well as the purchaser’s. A few states instruct you to just accept the certificate in good faith.
Review your files regularly. Some states’ certificates never expire; others expire after one, three, four, five or 10 years. States’ exemption certificates also change frequently, and “evergreen” ones should be updated every three to five years at least.
Keep tabs on your certificates’ validity by state and by customer (either manually or via an automated process like the TaxConnex managed service). Also monitor if you’re missing any certificates and that your on-file certificates exactly match the transactions you claimed as exempt.
Never put your certificate management on autopilot. There’s no quicker route to an audit nightmare.
Watch our webinar “Strategies for Managing a Sales Tax Audit” to learn more about being prepared for an audit and how to handle one effectively.
Contact us to find out if your business could be impacted by resale and exemption certificates and to gain a better understanding of this burden of sales tax compliance and the danger of sales tax audits.